Cost of Savings Index (COSI)

An index that may be used to determine the interest rate changes of an adjustable rate mortgage (ARM). The Cost of Savings Index, or COSI as it is commonly called, is based on money borrowed from consumers in the form of deposits and then lent out as home mortgages. The interest rates in effect on the deposits are the basis for the Cost of Savings index. The COSI is not not based on actual interest paid on deposit accounts, but rather the weighted annualized rate of all interest rates in effect on the last day of the month.

For this type of loan, you pay 2 or 3% above the average savings rates paid to depositors on savings accounts. As you may guess, with passbook interest rates so low, this type of loan could put your mortgage rate between 3.95% and 5.45%. In this type of “COSI” loan you make biweekly payments and the mortgage is paid in approximately 23 years. There are some adjustments that occur in the first 8 years but, as with most adjustable mortgages, there will be rate caps to protect you.

Who is a candidate for a COSI? This type of financing may appeal to two very different types of borrowers. If you relocate every five or six years, this type of mortgage will let you enjoy a very low payment on a high-end home. Therefore, allowing the transferee to enjoy more of “the good life” with a minimal mortgage payment (almost like rent). The downside is there will be little equity in the home when the next relocation comes. The second group this mortgage appeals to are those who have found “the house” and will be in this home for a very long time. In this case, the COSI loan will provide a low interest rate that allows the principal to be paid down at a greater rate than a conventional loan. By making extra principal payments, you can accelerate your equity in the home much faster than the conventional mortgage. In most cases, whether it is 5, 8 or 10 years later, adjustable mortgages are converted to another type of loan. This is done to lock in a good rate or to go back into the equity of the home to pay for educational needs or home improvements.